Wavell wrote identical letters to Nehru and Jinnah on July 22, 1946 asking them whether the Congress and the Muslim League would be prepared to enter an interim government on the basis that six members(including one Scheduled Caste representative) would be nominated by the Congress and five by the Muslim League. Three representatives of the minorities would be nominated by the Viceroy. Jinnah replied that the proposal was not acceptable to the Muslim League because it destroyed the principal of parity. At Nehru's invitation, he and Jinnah conferred together on August 15 but could not come to an agreement on the question of the Congress joining the interim government.

The Working Committee of the Muslim League had decided in the meantime that Friday 16 August, 1946 would be marked as the 'Direct Action Day".There was serious trouble in Calcutta and some rioting in Sylhet on that day. The casualty figures in Calcutta during the period of 16-19 August were 4,000 dead and 10,000 injured. In his letter to Pethick-Lawrence, Wavell had reported that appreciably more Muslims than Hindus had been killed. The "Great Calcutta Killing" marked the start of the bloodiest phase of the "war of succession" between the Hindus and the Muslims and it became increasingly difficult for the British to retain control. Now, they had to cope with the Congress civil disobedience movement as well as furious Muslims that had also come out in the streets in thousands.

The negotiations with the League reached a deadlock and the Viceroy decided to form an interim government with the Congress alone, leaving the door open for the League to come in later. A communiqué was issued on August 24 which announced that the existing members of the Governor General's Executive Council had resigned and that on their places new persons had been appointed. It was stated that the interim government would be installed on September 2.

Jinnah declared two days later that the Viceroy had struck a severe blow to Indian Muslims and had added insult to injury by nominating three Muslims who did not command the confidence of Muslims of India. He reiterated that the only solution to Indian problem was the division of India into Pakistan and Hindustan. The formation of an interim government consisting only of the Congress nominees added further fuel to the communal fire. The Muslims regarded the formation of the interim government as an unconditional surrender of power to the Hindus, and feared that the Governor General would be unable to prevent the Hindus from using their newly acquired power of suppressing Muslims all over India.

After the Congress had taken the reins at the Center on September 2, Jinnah faced a desperate situation. The armed forces were predominantly Hindu and Sikh and the Indian members of the other services were also predominantly Hindu. The British were preparing to concede independence to India if they withdrew the Congress was to be in undisputed control, the Congress was to be free to deal with the Muslims as it wished. Wavell too, felt unhappy at the purely Congress interim government. He genuinely desired a Hindu-Muslim settlement and united India, and had worked hard for that end.

Wavell pleaded with Nehru and Gandhi, in separate interviews, that it would help him to persuade Jinnah to cooperate if they could give him an assurance that the Congress would not insist on nominating a Nationalist Muslim. Both of them refused to give way on that issue.Wavell informed Jinnah two days later that he had not succeeded in persuading the Congress leaders to make a gesture by not appointing a Nationalist Muslim. Jinnah realized that the Congress would not give up the right to nominate a Nationalist Muslim and that he would have to accept the position if he did not wish to leave the interim government solely in the hands of the Congress. On October 13, he wrote to Wavell that, though the Muslim League did not agree with much that had happened, "in the interests of the Muslims and other communities it will be fatal to leave the entire field of administration of the Central Government in the hands of the Congress". The League had therefore decided to nominate five members for the interim government. On October 15, he gave the Viceroy the following five names:

Liaquat Ali Khan, I.I Chundrigar, Abdur Rab Nishtar, Ghazanfar Ali Khan and Jogindar Nath Mandal. The last name was a Scheduled Caste Hindu and was obviously a tit-for-tat for the Congress insistence upon including a Nationalist Muslim in its own quota.